TEXT-Fitch rates Jaguar Land Rover's senior unsecured notes 'BB-(EXP)'

Wed Jan 23, 2013 7:25am EST

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Jan 23 - Fitch Ratings has assigned Jaguar Land Rover PLC's (JLR, 'BB-'/Stable) proposed senior unsecured notes a 'BB-(EXP)' expected rating.

The final rating is contingent upon the receipt of final documents conforming to information already received. The notes are rated at the same level as JLR's Issuer Default Rating of 'BB-' as they will constitute direct, unconditional, unsecured and unsubordinated obligations of the company.

Using the top-down approach under its "Parent and Subsidiary Rating Linkage Criteria", Fitch rates JLR a notch below the rating of its parent Tata Motors Limited (TML, 'BB'/Stable). This reflects the two entities' strong linkages, JLR's strategic importance to TML and the direct/indirect support provided by TML since it acquired JLR in the financial year ended March 2009. JLR accounted for around 69% of TML's consolidated revenues and about 72% of its EBITDA in H1FY13, up from 63% and 69%, respectively, in FY12. TML's rating factors in a single notch uplift for potential support from the ultimate owner, Tata Group.

JLR reported strong revenue growth of 23% yoy to GBP6,927m during H1FY13 and high operating profitability of 13.8% (H1FY12: 13.4%). This was driven by high sales volumes of Land Rover vehicles and more sales from China. JLR's sales in China increased to 21.4% of total sales volumes during Q3FY13 from 16.4% a year ago.

JLR's strong revenue and margins have helped to largely offset TML's poor performance. TML's unconsolidated revenue fell 7% yoy during H1FY13 to INR229.1bn with EBITDA margins of 5.9% (H1FY12: 7.4%).

On a consolidated basis, TML's net leverage improved to 0.98x in FY12 from 1.21x in FY11 largely due to JLR's substantially higher cash balances. As of end-FY12, JLR had a cash balance of GBP2.4bn (FY11:GBP1bn). Fitch expects a similar trend to persist in FY13.

The ratings are constrained by JLR's limited product portfolio, its shorter operating history and lower volumes compared with more established and highly rated premium car manufacturers. In Fitch's opinion, the prevailing weak global economy may also pose a challenge for maintaining volume growth over the next one to two years.

WHAT COULD TRIGGER A RATING ACTION?

Negative: Future developments that may, individually or collectively, lead to negative rating action on JLR include:

-A weakening of linkages between the Tata Group and TML

-A weakening of linkages between TML and JLR

-TML's consolidated financial leverage (excluding that of TML's financial subsidiary - Tata Motors Finance Limited ) exceeding 2x on a sustained basis due to reduced sales or profitability (at TML or JLR), or due to higher-than-expected debt

Positive: Future developments that may, individually or collectively, lead to positive rating action on JLR include:

-Higher volume growth for TML (standalone) and JLR through increased geographic and product diversification, without significant margin erosion from FY12 levels

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